Q&M Dental Group

UOBKayhian on 14 Aug 2012

Valuations
· Q&M Dental Group (Q&M) is currently trading at a valuation of 45.8x 2011 PE and 25.3x 2012F PE vs consensus earnings growth of 13.0%.
What’s New
· Q&M announced that it has sealed a non-binding memorandum of understanding (MOU) with Kunwu Jiuding Capital Co Ltd (KJC) for the Chinese private equity (PE) firm to invest a total of Rmb192m-240m for up to 20% equity stake in Shanghai Q&M Investment Management and Consulting Co Ltd. At such an evaluation, Q&M’s China operation is worth at least Rmb960m or S$188.2m, vs its total market capitalisation of S$209m.
· To recap, the group has invested Rmb20.7m in two Chinese dental healthcare groups at various stakes that guarantees a profit of Rmb1.76m due to Q&M. These two dental healthcare groups operate a total of seven dental clinics, one dental centre and a mobile dental clinic in Beijing and Nanjing cities.
· On top of these, Q&M has also proposed another five JVs with a total intended investment quantum of Rmb157.9m in China to generate another Rmb17.6m in profit for the Group. This is in line with Q&M’s strategy of growing its Chinese operation to achieve a combined profit of Rmb70m-80m through JVs and Q&M branded dental clinics and laboratories, for its eventual spin-off and listing in either Hong Kong or China by 2015. We believe the Rmb240m capital injection is for this purpose.
Our view
· This is definitely a positive for Q&M as the group has been actively seeking funds to expand its China operations. Q&M had previously announced that they will invest Rmb400m in China but with its cash on hand only at S$14.9m (Rmb76m) as at 30 Jun 12, it came to no surprise that Q&M had to secure capital injections of all forms. The last strategic investment was a US$15m funding from International Finance Corporation (IFC) by means of US$10m senior loan and US$5m convertible loan in Apr 11. The convertible loan has since been converted to 9.1m shares in April this year.
· Q&M can also leverage on KJC’s experience in China’s expansion and listing expertise due to its strong investment track record. KJC is a leading PE firm in China with more than 50 branches and agencies across the country. Some of its successful investments and subsequent IPO listings in China include Gifore Agricultural Machinery, Jiangsu Huifeng Agrochemical, Henan Billions Chemicals and Hunan Er-Kang Pharmaceutical. It was also ranked first in China’s Top 30 PE Fund by Zero2IPO Group.
Financial highlights
· In a separate announcement, Q&M reported a 20.5% yoy increase in revenue to $13.5m for 2Q12 driven by new dental outlets in Singapore and from higher contribution in the dental equipment and supplies distribution business. However, Q&M’s PBT declined 14.3% yoy to $1.2m as the group had to record start-up costs for its newly-opened dental clinics and centres. The group has also declared an interim dividend of 0.3 S cents to its shareholders.